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C O N F I D E N T I A L SECTION 01 OF 05 CARACAS 000817
SIPDIS
ENERGY FOR CDAY AND ALOCKWOOD, DOE/EIA FOR MCLINE
HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR RJARPE
COMMERCE FOR 4332/MAC/WH/JLAO
NSC FOR RKING
E.O. 12958: DECL: 06/30/2019
TAGS: EPETEINVENRGECONVE
SUBJECT: VENEZUELA: RECENT EXPROPRIATIONS' IMPACT ON THE
OIL SECTOR
Classified By: Economic Counselor Darnall Steuarat, for reasons
1.4 (b) and (d).
¶1. (C) SUMMARY: Recent oil service sector expropriations in
Venezuela targeted two diverse groups: (1) water injection
and natural gas compression operations related to crude oil
production; and (2) launch operators on Lake Maracaibo that
had organized and threatened to strike over PDVSA's arrears.
Both types of expropriation will affect negatively
Venezuela's oil production levels.
¶2. (C) The expropriation of the Lake Maracaibo launch
operators will however have a broader economic impact on the
communities on the Eastern side of the lake where most of
these firms operated. The economic ripples of the seizures
are already being felt at nearly all levels of the regional
economy: from casual workers who used to work for the launch
operators to the catering companies that used to provide
subsidized meals to launch company workers to the food
vendors that supported the catering companies. The central
government will now have greater economic control in Zulia
state, a state that has steadfastly been in opposition to
Chavez. Since the recent expropriations, locally owned
companies have stopped complaining publicly about lack of
payments. All involved know that PDVSA is the source of the
payments problems, but no one is willing to protest against
the state-run petroleum company. Some protests continue, but
instead target the next rung down on the ladder, i.e., the
large private service companies that are also behind on
payments to many of their providers due to PDVSA's lack of
payments. In the meantime, PDVSA has successfully deferred
the arrears it owed to the expropriate companies to the
future. END SUMMARY.
Why These Expropriations
------------------------
¶3. (C) The recent oil service sector expropriations targeted
three market segments: (1) water, natural gas, and steam
injection services, (2) water and natural gas compression
services, and (3) launch operations on Lake Maracaibo. While
most interlocutors speculate that the GBRV's initial target
was the launch operators, the passage of the National
Assembly's oil services expropriation law on May 7 followed
by the immediate seizure of Williams' Wilpro subsidiary seems
to indicate the GBRV was responding to a default notice by
Williams which would have taken effect on the same date. In
fact, the new law appears to target both (1) the Lake
Maracaibo launch operators, and (2) Williams' Wilpro and Wood
Group's Simco injection operations. Wood Group filed a
ninety-day default notice with PDVSA first on December 1,
2008 (expired February 28, 2009) and its operations were
quietly seized by PDVSA on March 4. On April 29, Williams
announced publicly that it had taken a $241 million non-cash
charge to net income on its operations in Venezuela. Its
default notice was set to go into effect on May 7. The
National Assembly introduced on May 5 and passed on May 7 the
oil services sector expropriation law, effectively giving the
GBRV the right to seize the Wilpro operations prior to it
going into default. PDVSA officials, accompanied by a
Venezuelan judge and the National Guard, began the
expropriation of Wilpro assets at midnight the night of May
7-8, hours after Chavez promulgated the new law.
¶4. (C) On Saturday, January 24, many of the now expropriated
launch operators on Lake Maracaibo met with PDVSA to discuss
the outstanding payments. At that time, PDVSA officials
pushed the launch operators (the majority of which were
domestic companies who claimed they were ready to strike), to
bring in offshore dollars to maintain operations. PDVSA also
CARACAS 00000817 002 OF 005
asked for a detailed personnel list with the offer that it
might consider paying the laborers directly. On January 27,
PDVSA seized the ENSCO 69 drill rig in PetroSucre, an action
that might have caused the launch operators to reconsider
taking any coordinated action against PDVSA. It is highly
likely, however, that PDVSA began drawing up plans to deal
with them at that time. One Embassy source posits that the
threat of concerted action by the launch operators caused the
GBRV to believe the private sector would seek to shut down
oil operations in the West. According to his theory, this
raised memories of the oil strike (which was more successful
in the west than in the east), and caused Chavez to seek to
strike out against the private sector. Thus, while the new
oil services sector law was likely timed to the Williams
default, it provided the perfect vehicle for the GBRV to go
after the western launch operators as well.
¶5. (C) Another U.S. firm, Exterran, has been affected by this
wave of expropriations. As of June 6, PDVSA had completed
the expropriation of its Venezuela assets, which provided
natural gas compression and injection and electric power
generation services for many oil field projects throughout
Venezuela. Exterran was a minority partner with Wood Group
in Simco and a minority partner with Williams in Wilpro. In
addition, Exterran had 214 electric power and other units
spread throughout Venezuela's oil sector (including in
Maracaibo, Apure, Anaco, El Tigre, Maturin, and Corocoro).
To date, the Ministry for Energy and Petroleum has not named
Exterran in a published expropriation resolution. The
seizure of these assets, however, may yet have an even more
negative impact on Venezuelan oil production.
Economic Impact of Expropriations: In Zulia
--------------------------------------------
¶6. (C) The GBRV expropriations of oil service companies on
Lake Maracaibo is already hurting local economies dependent
on providing services to the expropriated private companies
and will eventually impact oil production negatively.
Several businesspeople whose launch companies were seized
told PetAtt and visiting Washington energy analyst the week
of June 2 that PDVSA was operating their boats and some had
already broken down. Since the seized companies all had
spare vessels prior to expropriation, these initial
breakdowns will have little impact because PDVSA now has
spare boat capacity. The businessmen pointed out, however,
that while PDVSA has spare capacity now, it is only a matter
of time before it runs out of functional vessels and will
have no one to call on to provide transport services on the
lake. PDVSA will then face significant challenges moving
crews and supplies out onto Lake Maracaibo to operate and
maintain the thousands of wells and other oil facilities.
¶7. (C) On June 1-2, casual workers formerly employed as
needed by the expropriated launch companies, protested
PDVSA,s failure to hire them in Ciudad Ojeda (eastern side
of Lake Maracaibo and the base for many of the launch
companies. Rafael Ramirez, Minister of Energy and Petroleum,
PDVSA President, and Zulia state head of Chavez,s PSUV
political party, reportedly distributed 300 PDVSA
identification cards effectively employing the lucky
recipients. He also sponsored a food distribution for
displaced workers. One Chavista protester held a sign that
read, "Chavez ) We are with you, but we are hungry." Press
reports indicate PDVSA claims it will process a thousand new
workers per week from the expropriated firms until all are
hired.
¶8. (C) A member of the Ciudad Ojeda Chamber of Commerce told
PetAtt and visiting Washington energy analyst that the
CARACAS 00000817 003 OF 005
expropriations would affect nearly 75% of the population of
the oil-dependent region. He broke the economic impacts down
into three levels. In the first level, those directly
expropriated, he included 60-70 companies and 9,600
workers. The second level of the economic pyramid includes
800 micro, small, and medium-sized companies that provided
goods and services directly to the first level expropriated
companies and employ some 20,000 workers. The third level
and base of the pyramid includes a further 5,000 micro, small
and medium-sized companies and cooperativas (coops) that are
indirectly related to the expropriated companies, and employ
some 80,000 workers. This image of an economic pyramid
depicts the general impact on the local economy of the
expropriations. The economic ripples of the seizures are
already being felt at nearly all levels of the regional
economy: from casual workers who used to work for the launch
operators to the catering companies that used to provide
subsidized meals to launch company workers (PDVSA does not
provide such benefits) to the food vendors that supported the
catering companies. In fact, the central government will now
have greater economic control in Zulia state, a state that
has steadfastly been in opposition to Chavez.
Impact of Expropriations on Other Service Companies
--------------------------------------------- ------
¶9. (C) The expropriations have helped PDVSA postpone some of
its outstanding debt, but it still owes billions more to
other service companies. PDVSA continues to trickle payments
out in an apparently haphazard manner; one firm reported that
it believes PDVSA has set up a committee to oversee payments
and there is likely a strategy in play to keep companies on
life support and working. The impact of PDVSA not paying is
hurting not only the service company but also its
subcontractors. Companies such as Halliburton are limiting
payments to their own suppliers and service providers, as
they are not receiving any significant payment streams from
PDVSA. Halliburton (and others) is downsizing its staff,
limiting operations, and cutting costs. We believe that the
majority of international service companies have been told by
their home offices that they will no longer receive external
financial support. Most firms have prioritized maintaining
worker wages. With whatever funds are leftover, they parcel
out some money to their service providers and supply chain by
prioritizing who they think needs a cash infusion the most.
This situation continues down through the oil sector
hierarchy. Both of Halliburton's bases in Maracaibo and
Maturin were shutdown for several days in June due to
protests outside their gates by second and third level
companies in its supply chain. Companies and workers know
PDVSA is the source of payments issues, but no one is willing
to protest against PDVSA; instead, they have targeted the
next rung on the ladder.
Continuing Payments Issues?
---------------------------
¶10. (C) Since the initial May oil sector expropriations,
public complaints from oil service companies and media
stories focusing on PDVSA's daunting arrears have largely
disappeared. The private sector seems to have learned a hard
lesson about the GBRV,s likely reaction to such complaints
from this round of expropriations. Companies continue to
struggle with payments from PDVSA trickling out at levels
less than 10% of total owed.
¶11. (C) PDVSA's financial report for 2008, released in
February 2009, indicated it carries nearly $14 billion in
debt to service companies. There is no other public figure
available on the debt owed to the expropriated service
CARACAS 00000817 004 OF 005
companies. Roughly, we believe the outstanding debt owed to
expropriated international firms was Williams $100 million,
Wood Group $130 million, Exterran $130 million, and Tidewater
$35 million. These might represent the largest debts owed to
expropriated companies. According to a Petroleum Chamber
director, PDVSA owed Chamber member companies $300 million.
Thus, the expropriations of these companies might suggest
that PDVSA has not eliminated or postponed a majority of its
outstanding arrears. It has only postponed payment until a
future point when the parties involved agree to a negotiated
settlement for seized assets. Instead, PDVSA may have
significantly increased its liabilities through the
expropriations by assuming the private companies' liabilities
and the need to pay compensation for the assets.
¶12. (C). According to the May oil services sector law,
companies will be compensated for seized assets at book
value. According to local energy lawyers, this law
contradicts the Venezuelan constitution and other laws that
indicate compensation for expropriated assets should be fair
market value. The new law also provides that labor and
environmental liabilities will be discounted from the amount
of the compensation to be paid to the affected parties.
Owners of expropriated assets indicated to PetAtt and
visiting Washington energy analyst that they believe they
will be fortunate &to walk away with the shirts on their
backs8 once the government has subtracted labor and
environmental costs from the book value of their assets.
Some speculated that, with the new law,s pricing formula,
they might have to pay the GBRV just to settle the
expropriations.
¶13. (C) COMMENT: Regardless of the political or economic
background to the latest oil service sector expropriations,
the common denominator is that the action conforms with the
GBRV's playbook ) push current financial troubles into the
future, regardless of the actual mid to long-term costs of
this strategy. Western firms claim that by the Fall of 2009
they will shut down unless they receive substantial payments
of current arrears and they believe that if they shut down
the apocalypse will occur in Venezuela. For its part, the
GBRV believes firms will flock to Venezuela just because of
the country's huge oil reserves. There is likely too much
crude oil in Venezuela to believe that this industry will
implode, but if it continues, its current trajectory it will
resemble Cuba's decimated sugar industry. If Western firms
decide they cannot continue in Venezuela, we should expect to
see the GBRV turn more towards China and other "like-minded"
countries to develop the Venezuelan oil industry. The
problem the GBRV will have is that these "alternative"
companies are looking for economic and not political
opportunities. CNPC and Petropars both operate out of a
profit motive, just like ConocoPhillips and Exxon Mobil. In
the meantime, companies are continuing to work to develop
these reserves, albeit at a lower level of efficiency brought
about by partnering with PDVSA and with smaller profit
margins. But for how long? Private sector cries that this
situation is unsustainable make sense from an entrepreneurial
standpoint, but do not reflect the political agenda of
Chavez's 21st Century Socialism. END COMMENT
¶14. (SBU) For more background on topics mentioned above,
please see the following cables: payments to service
companies - CARACAS 136, CARACAS 214, CARACAS 239, CARACAS
288, CARACAS 362, CARACAS 428, CARACAS 440, CARACAS 541,
CARACAS 545, CARACAS 548; mission creep in PDVSA ) 2008
CARACAS 473; PDVSA's financial situation ) CARACAS 564,
CARACAS 282, 2008 CARACAS 276, 2007 CARACAS 2346;
nationalizations inside and outside the oil sector - 2007
CARACAS 00000817 005 OF 005
CARACAS 1281, 2007 CARACAS 2013, 2008 CARACAS 1690, CARACAS
581, CARACAS 592, CARACAS 644, CARACAS 707, CARACAS 725.
CAULFIELD